The U.S. Tax System is Going to be Disrupted Before it is Reformed.

 

It’s likely that we will see fundamental tax disruption in the US before we see even modest tax reform. And that will shake the very basic fundamentals of our economic and political systems.

THE DIFFERENCE BETWEEN DISRUPTION AND REFORM.  We’re beginning to understand that many of the “technology” companies that have become so consequential so quickly are not technology companies at all.  They are disruption companies.  The recent but now classic case history is Uber. They looked at an industry – taxicabs – that had no fundamental change in its model for decades. They rethought the very basic premises of how the process works and how it could be reworked. They applied fairly simple technology to change the way people behave and in the process put the old model at real risk of becoming extinct. That’s “disruption.” By comparison, “reform” is when changes – even dramatic changes – are made but without reconsidering the sacrosanct basic premises of what is being changed. For example, requiring taxis to post fare information and provide seat belts for passengers. Such reforms often are needed and can achieve important end goals. But disruption is always more powerful and consequential than reform.

 

THE PROSPECTIVE REFORM OF THE U.S. TAX SYSTEM. Changing the tax system is one of the favorite goals our political leaders like to cite as something that absolutely needs to be done. They are dedicated to it. (Dissolve to picture of politician, thumbs behind lapels, saying “I ran for office so that I could get things like tax reform done.”)

 

They like the concept of being for tax reform so much that they haven’t done anything substantive to change the system since President Reagan’s landmark changes in 1986, thereby giving themselves about three decades to talk about the next tax reform that’s needed and how they are going to make it happen. Well, that’s not entirely true: there have been changes around the edges in the tax system since 1986, primarily to respond to pressures from special interest groups and topical urgencies.  But basically, our political leaders have not really confronted tax reform in any way other than as talking points in their political campaigns. Given this track record, exacerbated by the current and likely-to-continue political gridlock on Capitol Hill, the chances of real reforms of our tax system are slim-to-none.

 

THE PROSPECTIVE DISRUPTION OF THE U.S. TAX SYSTEM.  Disruptions happen when those who control the status quo fail to recognize how the status quo has become obsolete, as in the case of the installed taxi cab  industry powers not realizing that Uber would make their model obsolete. In the case of our tax system, the current powers-that-be fail to recognize the cultural changes of the taxpayers.  As the accessibility to information and services via the Internet has exploded, people have learned that a lot of what they used to pay for is now available, often in better form, for significantly less or even for free on the web.  As that happens, people support services that provide them with the best value.  They also coalesce with others who share their interests (hobbies, politics, religions, etc.) to create new communities – new social networks.  So, whether they are deciding how to spend their money or their time, they are driven by the same goal: to access value.  And that is the fundamental problem that will lead to the disruption of the tax system: tax collectors will have a very difficult time telling taxpayers that they get value for their taxes. Uh oh!

 

HOW THE COMMUNICATIONS REVOLUTION MADE THIS POSSIBLE. People can now access whatever they want whenever they want it, wherever it may be via the Internet. Extrapolate into the future what you see happening around you now: people will define themselves and structure their time and spending around the communities that exist and to which they belong largely online. As this phenomenon imbues itself more and more into our culture, people will question: 1) Why do I belong to (or support) one community over another? and 2) Am I getting the value from this community that I want for what I am paying (in either money or time)?

 

As an easy example, if I am a tic-tac-toe fan I will have a wide choice of which tic-tac-toe community to join. I am going to make my choice based on the community that I think provides me the best tips on how to win, has the best chat board with other tic-tac-toe fans, sells the best tee shirts, and does it all for the most reasonable fee (often free). The tic-tac-toe communities that don’t provide value aren’t getting my participation or my support of time and money. Well, the tic-tac-toe example is pretty inane. But what about my nation? Throughout history, my nation was determined primarily because of where I lived – I had little or no choice in the matter.   But geography will control my decision less and less. Instead, I’ll question: What does the government provide me that I really value?  An education for my kids, for one thing; but I will increasingly be able to get better values through online schools that will cost a lot less than the taxes that pay for my local schools. My nation (and local government) also pays for my safety with police and fire department services; but I can subscribe to my own private services that monitor matters of specific concern to me and will fight for my business by providing better service for better value. My nation pays for the roads I use; but, it won’t be that long until I’ll ride in a driverless car making road repair and improvement less of an issue.

 

IN OTHER WORDS:  IF THE GOVERNMENT (FEDERAL, STATE, OR LOCAL) DOESN’T PROVIDE ME VALUE FOR MY TAXES, WHY SHOULD I PAY MY TAXES?  And, as I and my neighbors and friends ponder that question in the future more and more frequently, the time will be right for the entire tax system to be disrupted. It will be beyond reform by that point. I do not know what the disrupted system will look like, but it will evolve.  And when that happens, what will happen to the very concept (and reality) of nations? That concept will be disrupted and so will our culture, politics, economy and ways of governance – just as Uber has disrupted the taxi industry and our ways of getting from one point to another.